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Wall Street strategists are bullish on 2024, but so are the analysts. Both are usually wrong. The S & P 500 closed at a new 52-week high on Friday, and with good reason: The Street not only believes the Fed is done hiking rates, but it is also very bullish on earnings next year. Last week, Wall Street strategists (who forecast broad movement in the markets using macroeconomic trends) weighed in with mostly bullish price target forecasts for the S & P 500 in 2024, and I noted that they have a historically poor track record of forecasting the S & P 500 one year out. The analyst community (which forecasts individual stock earnings and prices) is also making estimates for 2024. Like their strategist brethren, they are an optimistic lot on the whole, forecasting earnings of $246.30 for the S & P 500 2024, a jump of about 12% from 2023 and a new record for earnings, according to FactSet. Unfortunately, like their macroeconomic strategist brethren, Wall Street analysts also have a long history of being wrong on their forecasts. Earnings forecasting: a big gap between prediction and reality Over the past 25 years, the average difference between analyst estimates at the beginning of the year and the final number for that same year has been 6.9%, according to FactSet. An overestimation of 6.9% is a large miss. Not surprisingly, stock prices tend to follow earnings growth: Earnings for the S & P 500 typically go up 6%-10% a year, which is typically what the stock market would move when averaged out over long periods. Since the S & P 500 rises in almost three out of four years, analysts are understandably a generally bullish group. They have overestimated the final value in 17 of the 25 years and underestimated the final value in the other 8 years, according to FactSet. I and other financial journalists have been pointing out these large misses for many years, to the chagrin of analysts. The complaint from the analyst community boils down to this: “You’re not being fair to us, Bob. Many years we miss estimates because there is some big shock in the middle of the year that throws off everyone’s estimates. It’s hard to forecast the impact of a recession, or a terrorist attack, or a pandemic, or a major natural disaster.” All of that is true, but it’s beside the point: these “shocks” and many other smaller ones collectively happen with alarming frequency, which makes forecasting all but useless. Wars, recessions, pandemics, all throw off estimates Let me show you some of the more egregious examples. There have been four years in the last 20 where the analyst estimates at the start of the year differed from the final estimates by a margin greater than 25%. A difference of 6.9% is very large, but 25% or more is off the charts bad. “These large differences can be attributed to events that may have been difficult for analysts to predict at the start of the year,” John Butters at FactSet noted, and he’s right. When analysts missed big (% difference in ests. at start of year vs. final numbers) 2001 36% too high (9/11 attack) 2008 43% too high (Great Financial Crisis) 2009 28% too high (Great Financial Crisis) 2020 27% too high (Covid) Source: FactSet Notable recessions. Terrorist attacks. A global pandemic . Who could predict those? Not surprisingly, if you do some mathematical magic and simply make those four years go away, the analyst estimates get better: the average difference between the bottom-up EPS estimate at the start of the year and the final EPS number for that year would be 2.0%. That is a lot better than 6.9%, but it’s irrelevant. It’s the same problem with trying to exclude food and energy from inflation to come up with a “core” inflation number . The average consumer will say, “Sorry I don’t live in a world without food and energy.” Investors don’t get to exclude the lousy years from their stock portfolios, either. Big shocks happen more than you think Two points about this: 1) For the purpose of setting individual stock prices, analysts matter far more than strategists, because it is the analyst estimates that determine if a company “beats” or “misses” on their earnings; 2) These big market-moving events (recessions, pandemics, terrorist attacks), occur more frequently than most investors acknowledge. My friend, Morgan Housel, is one of the best financial writers on the subject of risk. He’s out with a new book, “Same as Ever: Timeless Lessons on Wealth, Greed and Happiness.” Here’s what he says about the likelihood of all those “shock” events: “If next year there’s a 1 percent chance of a new disastrous pandemic, a 1 percent chance of a crippling depression, a 1 percent chance of a catastrophic flood, a 1 percent chance of political collapse, and on and on, then the odds that something bad will happen next year — or any year — are . . . not bad.” So let’s not cherry-pick the best years and avoid the “magical thinking” of believing we could eliminate years when we all got clobbered. Analysts believe it’s going to be a record year, no matter what By the way, just to give you an idea of how bullish the analyst community is about 2024, here’s the math on how the numbers would look with the historic average over-estimation of 6.9% and if we exclude the four recent worst years and use an over-estimation of 2.0%: S & P earnings 2024:a record year, any way you slice it Current 2024 estimate: $246.30 (record year) Minus 6.9% overestimation: $229.25 (record year) Minus 2.0% overestimation: $241.38 (record year) Source: FactSet Well, isn’t that something. Any way you slice it, analysts collectively think 2024 is going to be a record year for stocks. No wonder the S & P 500 closed Friday at a new high for the year.
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